Taking the reins from 71-year-old former Federal Reserve Board Chaiwoman Janet Yellen Feb. 5, Fed Chairman Jerome Powell freaked out markets announcing that he expect to raise the Federal Funds Rate four times in 2018. Market showed their displeasure selling off the Down Jones Industrial midday by over 200 points or 0.77%. While that’s not a big deal considering this month’s sell-off that dropped the Dow from its high Jan. 26, 2018 of 26,392 to February 8, 2018 to 23,360 or 1,032 point.or 2.33%. drop. Powell’s remarks about four-more 25 basis-points hikes wrecked Wall Street’s attempt to regain its 3,032 drop earlier in the month. “At the December meeting, the median [FOMC] participant called for the rate increase in 2008,” Powell said, suggesting that current strengthening of the U.S. economy warrants rate hikes in 2018. Powell’s remarks triggered a 299-point sell-off.
Over 2,000 points up from its Feb.8 low, Powell has shown a far more aggressive approach to tightening than his two predecessors, former Fed Chairman Ben Bernanke and Yellen. Bernanke slashed the Federal Funds rate to zero to 0.25% Dec. 16, 2008 to deal with the economic meltdown caused by the crash of mortgage-backed securities. While there’s nothing wrong with the Fed’s Open Market Committee fine-tuning interest rates, promising four more rate hikes before anyone has a clue how Wall Street will do in 2018 scared investors. With the 10-year-treasury hitting 3.91% today, Goldman Sachs predicted yesterday that if the 10-year-treasury hits 4.5%, it would trigger a whopping 25% drop in major market averages, including the Dow, Nasdaq and S&P 500. Powell has already with his public remarks caused over a trillion dollars loss market capitalization—and 2018 hasn’t got off the ground.
Starting the job Feb. 5, Powell has yet to comprehend the power of the Fed’s words to move markets up or down. Expecting more tightening in 2018, Powell has given investors reason to pause, just as they were trying to reclaim losses from February’s 3,200 point sell-off. “Now since then [Fed’s December meetings] what we’ve seen is incoming data that suggests as strengthening in the economy,” said Powell. Most Fed governors say the Fed doesn’t set monetary policy by how Wall Street does. But if Wall Streets sells off or, worse yet, goes into bear territory, it plunges the economy into a recession, something the Fed wants to avoid. Number-crunchers at the FOMC look at the inflation rate, unemployment rate and labor rate to justify changing the Federal Funds rate, the rate the Fed lends to commercial banks. Talking about rates prematurely impacts Wall Street’s activity.
Powell knows that no matter how much momentum builds in markets, they can turn on a dime, especially when anticipating slower growth. Threatening four rate hikes in 2018 was enough to give traders reason to sell-off, take profits and wait-and-see what the FOMC does at its March meetings. Powell has all but guaranteed the first of four rate hikes in 2018. “We’ve seen continuing strength in the labor market, we’ve seen some data that will—in my case—add some confidence to my view that inflation is moving up to target,” said Powell, anticipating higher inflation. But if Wall Street corrects or goes into bear territory, inflation could flat-line or go back to deflation where consumers head to the exits, leaving the nation’s Gross Domestic Product stagnant or even shrinking into recession. It doesn’t take much for consumers to belt-tighten, leaving consumer spending and GDP flat.
Taking over from Yellen, Powell needs to measure his words carefully before he inadvertently triggers another sell off or prolonged bear market. With part-time employment calculated into the unemployment rate, heath care costs rising and rentals going through the roof, Powell’s dreaming thinking that inflation’s really heating up. Consumers need to open their wallets before inflation can really happen, despite the rise in food and energy costs, not something calculated into the inflation rate. When you consider part-time unemployment, rising health care and rental costs, it’s premature to talk about more rate hikes in the foreseeable future. “We’ve also seen continued [economic] strength around the globe, and we’ve seen fiscal policy become more stimulative, suggesting that lower corporate tax rates would give consumers the added cash to spend into the economy.
Powell jumped the gun, threatening Wall Street with more rate hikes when there are roadblocks to GDP growth and inflation going forward. No matter how good the economy looks today, a prolonged sell-off or bear market could plunge the economy into recession more easily than Powell thinks. If Wall Street’s already selling off with the hint of things to come, just imagine what will happen once Powell actually begins hiking rates. If markets sell off in response to Feb rate hikes, it will slow U.S. economic growth, forcing the Fed, at some point, to add more stimulus into its FOMC policy. Why raise rates so rapidly if you’re just going to slash rates again to stimulate the economy? “I think each of us is going to be taking the developments since the December meetings into account and writing down our new rate paths as we go into the March meetings and I wouldn’t want to pre-judge that,” said Powell.
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